Edited version of your written advice

Authorisation Number: 1051446986906

Date of advice: 6 November 2018

Ruling

Subject: GST and the transition of a government scheme to local arrangements

Question 1

Is there a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST) Act in return for the Payments made by government?

Answer

No, the payments made by the government are not consideration for a taxable supply.

Question 2

Is there a taxable supply (under section 9-5 of the GST Act) or creditable acquisition (under section 11-5 of the GST Act) where assets/liabilities are transferred pursuant to an Act?

Answer

No

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

Relevant facts and circumstances

A government entity owns and operates certain schemes.

Following concerns raised about the sustainability of the schemes, the State proposed to transition the schemes.

The business proposals submitted for each scheme consisted of financial and nonfinancial information outlining how the schemes could be run.

The financial information submitted included a financial model which calculated the net present value of the schemes.

The financial model was used to support the payment requested from the State.

The payment provides funds to cover the losses from the scheme.

The scheme is the system used to supply customers.

The scheme serves customers who primarily carry on business in industries.

There is a proprietary company limited by shares. The scheme board has determined that post-transition the company will operate on a not-for-profit basis with all surplus funds to be retained in the business. As such, shareholders will not receive dividends or distributions.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5

A New Tax System (Goods and Services Tax) Act 1999 Section 9-10

A New Tax System (Goods and Services Tax) Act 1999 Section 9-15

A New Tax System (Goods and Services Tax) Act 1999 Section 11-10

A New Tax System (Goods and Services Tax) Act 1999 Section 11-15

Reasons for decision

Section 9-5 of the GST Act provides that you make a taxable supply if:

● you make the supply for consideration

● the supply is made in the course or furtherance of an enterprise that you carry on

● the supply is connected with the indirect tax zone (Australia), and

● you are registered, or required to be registered for GST.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

Section 11-5 of the GST Act provides that you make a creditable acquisition if, among other requirements, the supply of the thing to you is a taxable supply.

To satisfy the first requirement of a taxable supply, it is necessary to determine whether the SPV is making a supply under section 9-10 of the GST Act and whether the cash payments or the assets transferred are consideration under section 9-15 of the GST Act.

If there is a supply and consideration, it will then be necessary to determine whether the consideration is for the supply. That is, there must be a sufficient connection or nexus between the supply and the consideration.

Section 9-10 of the GST Act defines supply broadly as 'any form of supply whatsoever'. The non-exhaustive list in subsection 9-10(2) of the GST Act serves to emphasise that a supply can be anything and can be provided by any means. This includes providing something by means of the supplier refraining from acting, or by means of the supplier tolerating some act or situation, just as it can be provided by means of the supplier doing some act.

Goods and Services Tax Ruling GSTR 2006/9 GST: Supplies examines the meaning of ‘supply’ in the GST Act. To assist in analysing a transaction to identify the supply made in the transaction, GSTR 2006/9 describes a number of propositions.

Proposition 5 states that an entity will make a supply whenever that entity (the supplier) provides something of value to another entity (the recipient).

In Commissioner of Taxation v. MBI Properties Pty Ltd [2014] HCA 49, the High Court noted that a transaction which involves a supplier entering into and performing an executory contract will in general involve the supplier making at least two supplies. The first being creation of contractual rights and obligations at the time of entry into the contract and secondly, a supply by means of contractual performance of the obligation.

While an entity may make a supply by observing an obligation, even if that involves no more than refraining from doing something or tolerating some act or situation, there will be no supply where something occurs by operation of law without an entity providing something or without any obligation being placed on the entity to provide something.

For example, in Shaw v. Director of Housing and State of Tasmania (No 2) [2001] TASSC 2, it was held that a judgment creditor makes no supply on extinguishment of the obligation to pay the judgment sum. In Reglon Pty Limited v. Commissioner of Taxation [2011] FCA 805, no supply was found to have been made when vesting of title in goods occurred by operation of law on satisfaction of the judgment in full.

Similarly, there is no supply within the meaning of section 9-10 of the GST Act when an entity assumes a liability that is imposed, required and effected by statute. This is so even if the assumption of the liability is set out in an agreement between the parties. The contractual clauses of an agreement merely confirm the operation of the statute. An example of such a liability is the liability for long service leave entitlements to employees. [Paragraphs 23 to 25 and 46 to 55 of Goods and Services Tax Ruling GSTR 2004/9 Goods and services tax: GST consequences of the assumption of vendor liabilities by the purchaser of an enterprise]

Turning to the facts of the arrangement:

● Payments – The funds are provided to ensure financial viability. While the funds may be used towards identified future capital expenditure and/or modernisation where appropriate, the company is not under any obligation to do or provide something in return for receiving the payments.

In addition, the company is not making a supply by assuming the liabilities for the employee entitlements.

● Transfer of assets and liabilities – the legislation will cause the transfer and is achieved in a similar way to that of a land acquisition by a gazettal notice.

Therefore, from the facts provided, no one is undertaking any action to effect the transfer and they are not providing anything in return for the transfer.

The company is not making a supply under section 9-10 of the GST Act nor making an acquisition under section 11-10 of the GST Act when the assets and liabilities are transferred.

As the company is not making a supply, there can be no supply for consideration as required by section 9-5 of the GST Act. As such, the company is not making a taxable supply when it receives the payments. It is also not making a taxable supply or creditable acquisition when the assets and liabilities are transferred to it.

As there is no supply to the company, there can be no creditable acquisition for the purposes of Division 11 of the GST Act when the assets and liabilities are transferred to it.